They promise high investment returns but are often risky and tend to use complex trading strategies.

The new measures, which put hedge funds under the eye of a pan-European watchdog for the first time, are part of a wider set of pledges by world leaders to create a more stable financial system after the global economic crisis.

Crucially, the proposed rules do not give funds the automatic right to sell across the 27-nation EU bloc.

Instead, funds who want to market to the EU will have to qualify through a new passport-style system.

Tim Geithner, the US treasury secretary, has complained that this is a "protectionist" move that could shut his country's funds out of the continent.

Political rules

The ministers will now negotiate with the European Parliament to decide the final details of any legislation which is due to come into force from 2012.